Technical Corner

Shooting Star

The Shooting Star pattern indicates an end to the existing upward move. It resembles the Inverted Hammer pattern in formation, except for that the Shooting Star occurs at market tops.

How to recognize a Shooting Star?1. Price opens gapup after an uptrend
2. A small real body is formed near the lower part of the candle
3. Real body is one third of the upper shadow
4. There is no or little lower shadow

Interpretation:

Price opens gap up on the day of the pattern formation. By the end of the day, a prevalent rally is aborted and the price closes near the low of the day. This is the reason for the long upper shadow. Now, when the market opens lower on the next day, people who were already long in the stock will close their existing long positions. And, new participants will enter into a short position further strengthening the the bearishness and trend reversal. This makes the price to close near the low.

A conservative trader can wait the confirmation before entering into a fresh short position. When we consider the complete formation of a shooting star, it actually consists of a green candle in first place, then a shooting star and finally the confirmation candle as the third one making it a 3-candle pattern called as evening star.